It is becoming increasingly common for parents to provide financial assistance to their children looking to reach big milestones, such as buying their first home. This is usually done through either a loan or a gift from parents or the parents’ family trust. You should seek legal advice about how best to do this so that your intentions are clearly recorded, and the funds are protected.
Generally, a loan provides you with more control and protection over the funds, but gifting can also be appropriate depending on your unique situation.
Loaning:
Advancing funds as a loan can be a useful tool. Your child can have the benefit of the funds now, and the funds can be repaid to you or your trust upon agreed terms. Some benefits of advancing funds as a loan include:
- You have the ability to determine whether interest will be charged and whether the loan will be repayable upon demand or upon a certain date or event.
- If your child separates from their spouse or partner, you are in a better position to call up the loan, therefore preventing it from being involved in a relationship property claim. This is an especially important consideration if your child and their partner do not have a valid contracting out agreement.
- Creating fairness in circumstances where there are multiple children, and you are only advancing funds to one. This becomes relevant when considering what will happen to the money upon your death. If you personally loaned the funds, the loan would be an asset of your estate, which the executors would look to call up and distribute in accordance with your wishes.
- The existence of a loan can sometimes make it more difficult for your child to obtain bank lending, however this can be lessened by ensuring terms are drafted with the bank’s first-ranking interests in mind.
Gifting:
Gifting funds to your children means that you or your trust is gifting the money with no expectation of repayment. The key considerations to think about when deciding whether to advance funds as a gift are:
- When the money is gifted to your child, you lose any control you may have over it. This means that they can utilise the funds however they might like.
- If your child is in a qualifying relationship, the gift will likely become relationship property. If the child and their partner were to separate, the funds may be exposed to a potential relationship property claim.
- Unequal gifting and a lack of gifting records can cause potential disputes during the administration of your estate in the future. If unequal gifting is your intention, you may need to consider recording the gift in your will to ensure it adequately covers this.
- Gifting can potentially affect eligibility to apply for the Residential Care Subsidy or other government benefits.
Seeking Legal Advice:
When deciding whether to loan or gift funds to your children, there are numerous legal and accounting matters to consider. It is essential that the terms you are advancing the funds on are precisely drafted and communicate your intention. Seeking legal advice will give you the confidence that you are advancing the funds in a way that best suits your needs for both the present and the future.
The team at Burley Castle Hawkins Law are highly experienced in this area and more than happy to assist you. Please do not hesitate to get in touch if you would like to discuss your next steps.
By Bronte Hemmings | Law Clerk | 07 571 7006 | bronte@bchlaw.co.nz
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter.
